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A Federal Appeals Court Just Dealt a Huge Setback To Obamacare

On Tuesday morning, a U.S. appeals court tossed out the IRS regulation that governs subsidies, dealing a huge blow to the Affordable Care Act.

On Tuesday morning, a U.S. appeals court tossed out the IRS regulation that governs subsidies, dealing a huge blow to the Affordable Care Act. In effect, the court overruled the subsidies in the 36 states that chose not to set up their own insurance exchanges, meaning that millions of Americans could become uninsured as health plans sold through the exchange may now become unaffordable.

The suit — which was ruled on by a 3-judge panel — is likely to have no immediate effect, as the Obama Administration will likely ask for a full “en blanc” ruling by an 11-judge panel. If that doesn’t work, they can appeal to the U.S. Supreme Court.

But, if the Obama Administration fails in its appeals, the lawsuit – Halbig v. Burwell – has the potential to affect 5 million people who purchased health plans through the federal insurance exchange. That number represents nearly 90 percent of all those enrolled through the federal exchanges.

If it stands in the long term, the ruling for the plaintiffs will have a ripple affect beyond the 5 million. According to California Healthline, the loss of the subsidies could begin a so-called “death spiral,” in which insurance premiums would sky rocket because not enough young people would be purchasing plans to offset the cost of older, less healthy individuals.

Additionally, Simon Lazarus, senior counsel at the Constitutional Accountability Center, told Newsweek  that the ruling may “radically increase the cost of all people who don’t have group insurance,” adding that an ultimate win for the plaintiffs “would literally blow [the insurance markets up."

He also said a win for the plaintiffs would eventually disrupt the ACA's individual mandate, because most people would no longer be able to receive the subsidies and would then qualify for a hardship exemption under the law because the premium would now be higher than 8 percent of their annual incomes.

The suit's 12 plaintiffs argued that the May 2012 Internal Revenue Service rule that allowed subsidies to be offered through the federal exchange should be stricken down because it contradicted what Congress originally intended in the ACA.

The plaintiffs lost in the U.S. District Court in January, when Judge Paul Friedman said that both the text of the ACA and the law's structure "make clear that Congress intended to make premium tax credits available on both state-run and federally facilitated exchanges." The plaintiffs then appealed the ruling, and initial arguments in the U.S. Court of Appeals of the D.C. Circuit were heard in March.

This time around, the judges did agree that the text of the statue itself is what Congress enacted, and not the unexpressed intentions of the bill. Judge Raymond Randolph joined Judge Thomas Griffith's opinion and wrote a concurrence, and Judge Harry Edwards dissented. The opinions are available here, but the text of Judge Griffith's introduction is below.

Section 36B of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act (ACA or the Act), makes tax credits available as a form of subsidy to individuals who purchase health insurance through marketplaces—known as “American Health Benefit Exchanges,” or “Exchanges” for short—that are “established by the State under section 1311” of the Act. 26 U.S.C. § 36B(c)(2)(A)(i). On its face, this provision authorizes tax credits for insurance purchased on an Exchange established by one of the fifty states or the District of Columbia. See 42 U.S.C. § 18024(d). But the Internal Revenue Service has interpreted section 36B broadly to authorize the subsidy also for insurance purchased on an Exchange established by the federal government under section 1321 of the Act. See 26 C.F.R. § 1.36B-2(a)(1) (hereinafter “IRS Rule”).

Appellants are a group of individuals and employers residing in states that did not establish Exchanges. For reasons we explain more fully below, the IRS’s interpretation of section 36B makes them subject to certain penalties under the ACA that they would rather not face. Believing that the IRS’s interpretation is inconsistent with section 36B, appellants challenge the regulation under the Administrative Procedure Act (APA), alleging that it is not “in accordance with law.” 5 U.S.C. § 706(2)(A).

On cross-motions for summary judgment, the district court rejected that challenge, granting the government’s motion and denying appellants’. See Halbig v. Sebelius, No.13 Civ. 623 (PLF), 2014 WL 129023 (D.D.C. Jan. 15, 2014). After resolving several threshold issues related to its jurisdiction, the district court held that the ACA’s text, structure, purpose, and legislative history make “clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated Exchanges.” Id. at *18. Furthermore, the court held that even if the ACA were ambiguous, the IRS’s regulation would represent a permissible construction entitled to deference underChevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

Appellants timely appealed the district court’s orders, and we have jurisdiction under 28 U.S.C. § 1291. Our review of the orders is de novo, and “[o]n an independent review of the record, we will uphold an agency action unless we find it to be ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’” Holland v. Nat’l Mining Ass’n, 309 F.3d 808, 814 (D.C. Cir. 2002) (quoting 5 U.S.C. § 706(2)(A)). Because we conclude that the ACA unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges “established by the State,” we reverse the district court and vacate the IRS’s regulation.

Originally posted on Politically Inclined